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Distribution capital and the short- and long-run import demand elasticity

  • Scott Davis

    (Federal Reserve Bank of Dallas)

  • Mario Crucini

    (Vanderbilt University)

International business-cycle models assume that home and foreign goods are poor substitutes. International trade models assume they are close substitutes. This paper constructs a model where this discrepancy is due to frictions in distribution. Imports need to be combined with a local non-traded input, distribution capital, which is slow to adjust. As a result, imported and domestic goods appear as poor substitutes in the short run. In the long run this non-traded input can be reallocated, and quantities can shift following a change in relative prices. Thus the observed substitutability between home and foreign goods gets larger as time passes.

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File URL: https://www.economicdynamics.org/meetpapers/2013/paper_453.pdf
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Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 453.

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Date of creation: 2013
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Handle: RePEc:red:sed013:453
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